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Sunday, November 19, 2006 3:34 AM

October Housing Starts, Permits, Foreclosures

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Was it just last month that Greenspan and David Lereah at the National Association of Realtors were declaring a bottom in housing?

That myth was shattered on November 17th when the Census Bureau released the Residential Construction Report for October 2006.

Building Permits

  • Building permits fell 6.3 percent to a seasonally adjusted annual rate of 1,535,000.
  • Building permits fell 28.0 percent from the October 2005 rate of 2,131,000.
  • Single-family authorizations in October were at a rate of 1,173,000. This is 3.8 percent below the September figure of 1,219,000.
Housing Starts
  • Housing starts fell 14.6 percent to a seasonally adjusted annual rate of 1,486,000.
  • Housing starts fell 27.4 percent from the October 2005 rate of 2,046,000.
  • Single family housing starts in October were at a rate of 1,177,000. This is 15.9 percent below the September figure of 1,400,000.
This was a record 9th consecutive decline in housing permits as well as the lowest permit total since December 1997. Housing permits are a leading indicator so a further deterioration of future economic activity is to be expected.

New Home Sales

Lereah was crowing about new home sales back on October 26 when Commerce Department reports showed “New-home sales in the U.S. unexpectedly rose for a second month in September as selling prices declined by the most since 1970. Purchases increased 5.3 percent to an annual pace of 1.075 million during the month from a 1.021 million rate in August. The median price of a new home dropped 9.7 percent from a year earlier, partly a result of more sales of homes priced less than $200,000 and fewer purchases of more expensive houses. “

New home sales may have risen in theory but in actual practice it is likely that sales declined considerably. The reason is that cancellations are not reflected in new home sales stats and cancellations have been soaring.

  • D.R. Horton (DHI) reported a cancellation rate of 40%, compared with 29% a year ago.
  • Meritage Homes (MTH) reported a 37% cancellation rate, compared with 21% a year ago.
  • Standard Pacific (SPF) reported a 50% cancellation rate compared with 18% a year ago.
  • The overall average cancellation rate for big builders was at 40%, about twice as high as last year's levels, according to the WSJ.
Bottom Calling

Lereah was not the only bottom caller in housing. When the the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) "exploded" by three points from 30 to 33 in the last two months, NAHB spokesmen offered these comments just one day prior to the release of the disastrous October housing starts data.
“More and more builders are seeing light at the end of the tunnel,” said NAHB President David Pressly, a home builder from Statesville, N.C. “Our members are telling us that the market is steadying after a significant downward correction. On the demand side, we look for sales to stabilize and gradually move up in the coming months.”

“With home prices leveling off, mortgage interest rates remaining near historic lows, energy prices declining and the economy continuing to generate solid growth in employment and household income, affordability is now on the mend and many consumers recognize that home buying conditions have improved,” said NAHB Chief Economist David Seiders. “Builders are picking up on this change in market momentum.”
HMI Charts

What the NAHB did not say was that the HMI is a diffusion index and that readings under 50 show contraction. Is a move from 30 to 33 statistically relevant?

Kevin Depew on Minyanville answered that question way back on October 18th when at that time the HMI index exploded up by one full point. Please consider the following charts.

Thanks Kevin & Minyanville!


RealtyTrac is reporting Foreclosures surpass 1 million mark in October.
“So far this year more than 1 million properties have entered some stage of foreclosure nationwide, up 27 percent from the same time last year,” said James J. Saccacio, chief executive officer of RealtyTrac.

“Monthly foreclosure filings were just below their high for the year, mirroring the trend from last year, when the most foreclosures of the year were also reported in October. Our data from the last three months shows that foreclosures are definitely trending upward, putting more pressure on an already strained housing market, and placing buyers and investors in the driver’s seat when it comes to negotiating home purchases.”
Foreclosures are actually close to historic lows, but the rate of change is ominous. Some of the bubble states like California are just now seeing an uptick because year over year home price appreciation was such that anyone having trouble making payments could escape simply by selling their home for a profit. With home prices no declining, mortgage rates resetting, and more home owners underwater that trend is about to change big time.

Housing Starts vs. Employment

The overall housing picture looks grim but is even worse than it looks, especially from an employment point of view. The following chart is courtesy of CalculatedRisk. It shows residential construction employment vs. housing starts offset by six months.

Click on the chart for an easier to read view.
Thanks CalculatedRisk!

The chart above shows that although starts have plunged, completions remain high. This has ominous implications for construction jobs looking ahead. Given that employment will follow housing starts with a lag as existing construction completes, it appears that a minimum of 600,000 construction jobs will be lost over the next six months or so.

The ripple effect of the loss of those jobs, especially on consumer spending will be very noticeable. If anything, this may be a best case scenario on the unlikely assumption that starts and permits do not decline further. Note too that with the expected decline in consumer spending as a result of housing sector weakness, layoffs will likely cascade to a wide variety of other jobs especially restaurants and retail sales jobs.

It remains to be seen if consumer spending ticks back up this Christmas season (I doubt it) but if it happens it will be the consumer’s last hurrah. A recession in 2007 is now all but guaranteed.

Mike Shedlock / Mish

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